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The untamable thirst for tax transparency

The war on tax evasion is a trending topic, especially following affairs such as the Lux-leaks and Panama Papers. A couple of weeks ago, the emotions were running high again in the Dutch parliament during a debate on tax evasion.

The focus of the debate was on tax rulings. In short, a tax ruling is an agreement in which the Tax Authorities confirm the application of the relevant tax laws to a specific situation. Rulings therewith provide companies with certainty in advance about their tax position, and have been a frequently used tool to attract foreign companies to the Netherlands.

Since January 1, 2017, the Dutch Tax Authorities are required to automatically exchange information about all cross border rulings to all EU member states. During the debate, politicians enthusiastically emphasized that this automatic exchange of information is thé way to combat tax fraud. We seriously doubt this.

Supported by mass media, the premise of the politicians is that rulings are smelly. As if multinationals could make all kinds of sneaky deals with the Dutch Tax Authorities to obtain a nice ‘tax windfall’ on their huge profits. That image is incorrect, as has also been publically confirmed by the European Commission and the Dutch Court of Audit. Of the more than 13,000 rulings that have been issued by the Dutch Tax Authorities in recent years, only a few (Starbucks) attracted the attention of the European Commission. With tax rulings, the Dutch Tax Authorities thus stay within the boundaries of the law. Therefore, the foundation of the alleged smelliness of the rulings remains unclear. Moreover, the application of tax laws to tax ‘assessments’ (issued afterwards) is perceived as correct and exchange of the latter is considered to contravene privacy laws, whereas the applicability of the same tax law to rulings is considered smelly and without data protection concerns.

Political opportunism – especially now in campaign time – prevails. Politicians seem to ignore the impact of automatic exchange of ruling information on the position of the Netherlands in the global trade market. With the risk of business sensitive information being exchanged, companies are less likely to request a ruling. This could possibly result in less investments in the Netherlands, as also recognized by the Dutch Minister of Foreign Affairs. Whether information classifies as a ‘commercial secret’ is within the sole discretion of the Dutch tax authorities. Objection to data exchange is not possible. The simple, but clear message from the Netherlands: if your information is erroneously exchanged with another country, you will have to knock on that other country´s door.

Another concern is that data will be shared with foreign governments, regardless of their reputation in the field of human rights and corruption. If our politicians already believe that all rulings are smelly, what image will foreign governments have? The possible consequences for companies are obvious, and we have not even yet talked about the real risks of data leaks.

The irony is that non-transparent companies that did not obtain a ruling remain completely off the tax radar, whereas well-intentioned transparent companies that provided ruling information to the Tax Authorities and have nothing to do with tax evasion, are punished. The extreme desire for more transparency will have the opposite effect, resulting in a decline in tax rulings and therewith less transparency.

We therefore seriously doubt whether this measure is the best (proportional) tool to address harmful tax practices. A more proportional and effective measure could for instance have been found in the context of the global introduction of country-by-country reporting, which requires companies to keep a copy of rulings with foreign jurisdictions in their master and local file. If these companies would be asked to report the existence of such rulings in their annual tax return, this could result in a more targeted approach by the relevant tax authorities and avoid unnecessary flows of (sensitive) information about (compliant) companies among States. Automatically sharing ruling information with all EU member states is more like using a sledgehammer to crack a nut, with the risk of exposing well-intentioned companies.